,Solution manual for Principles of Macroeconomics,
10th Edition N. Gregory Mankiw
Notes
1- The file is chapter after chapter.
2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many new
editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
Instructor Manual
Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of
Economics
Prepared by David R. Hakes, University of Northern Iowa
TABLE OF CONTENTS
Purpose and Perspective of the Chapter ....................................................................................................... 2
Chapter Objectives ................................................................................................................................................ 2
Complete List of Chapter Activities and Assessments .............................................................................. 3
Key Terms ................................................................................................................................................................ 3
What's New in This Chapter ............................................................................................................................... 4
Chapter Outline ...................................................................................................................................................... 4
Solutions to Text Problems ............................................................................................................................. 10
Questions for Review ...................................................................................................................................................... 10
Problems and Applications ........................................................................................................................................... 11
Additional Activities and Assignments ....................................................................................................... 14
Additional Resources ........................................................................................................................................ 15
Cengage Video Resources .............................................................................................................................................. 15
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
PURPOSE AND PERSPECTIVE OF THE CHAPTER
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to the text.
Chapter 1 introduces ten fundamental principles on which the study of economics is based. In a
broad sense, the rest of the text is an elaboration on these ten principles. Chapter 2 will develop
how economists approach problems while Chapter 3 will explain how individuals and countries
gain from trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as building blocks for
the rest of the text. The ten principles can be grouped into three categories: how people make
decisions, how people interact, and how the economy works as a whole. Throughout the text,
references will be made repeatedly to these ten principles.
Key points addressed in this chapter:
• The fundamental lessons about individual decision making are that people face trade-offs
among alternative goals, that the cost of any action is measured in terms of forgone
opportunities, that rational people make decisions by comparing marginal costs and
marginal benefits, and that people change their behavior in response to the incentives they
face.
• The fundamental lessons about economic interactions among people are that trade and
interdependence can be mutually beneficial, that markets are usually a good way of
coordinating economic activity, and that the government can potentially improve market
outcomes by remedying a market failure or by promoting greater economic equality.
• The fundamental lessons about the economy as a whole are that productivity is the ultimate
source of improving living standards, that growth in the quantity of money is the ultimate
source of inflation, and that society faces a short-run trade-off between inflation and
unemployment.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
• Explain how scarcity influences decisions.
• Explain how individuals evaluate opportunity costs to make decisions.
• Explain how marginal analysis influences decision making.
• Apply basic, economic principles of individual decision making that determine how an
economy generally works.
• Explain how the terms of trade can lead to gains.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
• Given a scenario, identify the distribution system being used.
COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS
The following table organizes activities and assessments so that you can make decisions about
which content you would like to emphasize in your class. For additional guidance, refer to the
Teaching Online Guide.
Activity/Assessment Source (i.e., PPT slide, Duration
Workbook)
Icebreaker Activity PPT Slide 2 5–10 mins.
Active Learning 1 PPT Slide 14 5 mins.
Active Learning 2 PPT Slide 17 5 mins.
Active Learning 3 PPT Slide 28 20–25 mins.
Think-Pair-Share Activity PPT Slide 39 5–10 mins.
Self-Assessment PPT Slide 40 5–10 mins.
Section 01-1 QuickQuiz MindTap eBook 5 mins.
Section 01-2 QuickQuiz MindTap eBook 5 mins.
Section 01-3 QuickQuiz MindTap eBook 5 mins.
ConceptClip: Efficiency MindTap Learn It Folder 5 mins.
ConceptClip: Opportunity Cost MindTap Learn It Folder 5 mins.
ConceptClip: Externality MindTap Learn It Folder 5 mins.
Chapter 01 Problems & Applications MindTap Study It Folder 45–60 mins.
Chapter 01 A+ Test Prep MindTap Study It Folder N/A
Chapter 01 Homework MindTap Apply It Folder 30–45 mins.
Chapter 01 Quiz: Ten Principles of MindTap Apply It Folder 20–30 mins.
Economics
[return to top]
KEY TERMS
Business Cycle: fluctuations in economic activity, such as employment and production
Economics: the study of how society manages its scarce resources
Efficiency: the property of society getting the most it can from its scarce resources
Equality: the property of distributing economic prosperity uniformly among the members of
society
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
Externality: the uncompensated impact of one person’s actions on the well-being of a bystander
Incentive: something that induces a person to act
Inflation: an increase in the overall level of prices in the economy
Marginal Change: an incremental adjustment to a plan of action
Market Economy: an economy that allocates resources through the decentralized decisions of
many firms and households as they interact in markets for goods and services
Market Failure: a situation in which a market left on its own does not allocate resources efficiently
Market Power: the ability of a single economic actor (or small group of actors) to have a
substantial influence on market prices
Opportunity Cost: whatever must be given up to obtain some item
Productivity: the quantity of goods and services produced from each unit of labor
Property Rights: the ability of an individual to own and exercise control over scarce resources
Rational People: people who systematically and purposefully do the best they can to achieve their
objectives
Scarcity: the limited nature of society’s resources
[return to top]
WHAT'S NEW IN THIS CHAPTER
The following elements are improvements in this chapter from the previous edition:
• An expanded discussion of inflation in the United States following the coronavirus recession
of 2020.
[return to top]
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in
PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that
you can see how all the content relates to the topics covered in the text.
I. Introduction
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
A. The word “economy” comes from the Greek word oikonomos meaning “one who
manages a household.”
1. Instruction Idea: Begin by pointing out that economics is a subject that
students must confront in their daily lives. Point out that they already
spend a great deal of their time thinking about economic issues: changes in
prices, buying decisions, use of their time, concerns about employment,
etc.
B. Both households and economies face many decisions about how to allocate
resources.
C. Resources are scarce so they must be managed carefully.
1. Instruction Idea: You will want to start the semester by explaining to
students that part of learning economics is understanding a new
vocabulary. Economists generally use very precise (and sometimes
different) definitions for words that are commonly used outside of the
economics discipline. Therefore, it will be helpful to students if you follow
the definitions provided in the text as much as possible.
D. Definition of scarcity: the limited nature of society’s resources.
E. Definition of economics: the study of how society manages its scarce resources.
1. Keep in Mind: Because most college freshmen and sophomores have
limited experiences with viewing the world from a cause-and-effect
perspective, do not underestimate how challenging these principles will be
for the student.
2. Instruction Idea: As you discuss the ten principles, make sure that
students realize that it is okay if they do not grasp each of the concepts
completely or find each of the arguments fully convincing. These ideas will
be explored more completely throughout the text.
II. How People Make Decisions
A. Principle #1: People Face Trade-offs
1. “There ain’t no such thing as a free lunch.” To get something that we like,
we usually have to give up, or trade for, something else that we also like.
2. Examples include how students spend their time, how a family decides to
spend its income, how the U.S. government spends tax dollars, and how
regulations may protect the environment at a cost to firm owners.
3. An important trade-off that society faces is the trade-off between
efficiency and equality.
a. Definition of efficiency: the property of society getting the most it
can from its scarce resources.
b. Definition of equality: the property of distributing economic
prosperity uniformly among the members of society.
c. For example, tax dollars paid by wealthy Americans and then
distributed to those less fortunate may improve equality but lower
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 5
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
the return to hard work and therefore reduce the level of output
produced by our resources.
d. This implies that the cost of this increased equality is a reduction in
the efficient use of our resources.
4. Recognizing that trade-offs exist does not indicate what decisions should
or will be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
1. Making decisions requires individuals to consider the benefits and costs of
some action.
2. What are the costs of going to college?
a. We should not count room and board (unless they are more
expensive at college than elsewhere) because the student would
have to pay for food and shelter even if she were not in school.
b. We should count the value of the student’s time because she could be
working for pay instead of attending classes and studying.
3. Definition of opportunity cost: whatever must be given up in order to
obtain some item.
a. Keep in Mind: One of the hardest ideas for students to grasp is that
“free” things are not truly free. Provide students with many
examples of such “free” things with hidden costs, especially the value
of time. Suggested examples include the time students spend waiting
in line for “free” sporting event tickets at their universities, time
spent relaxing in the sun outside their residence halls, or driving on a
road with no tolls but lots of congestion.
C. Principle #3: Rational People Think at the Margin
1. Economists generally assume that people are rational.
a. Definition of rational people: people who systematically and
purposefully do the best they can to achieve their objectives.
b. Consumers want to purchase the goods and services that allow them
the greatest level of satisfaction given their incomes and the prices
they face.
c. Firm managers want to produce the level of output that maximizes
the profits the firms earn.
2. Many decisions in life involve incremental decisions: Should I remain in
school this semester? Should I take another course this semester? Should I
study another hour for tomorrow’s exam?
a. Definition of marginal change: a small incremental adjustment to a
plan of action.
b. Example: Suppose that you are considering watching a movie
tonight. You pay $40 a month for a streaming service that gives you
unlimited access to its film library. If you typically watch 8 movies a
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 6
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
month, the average cost of a movie is $5. The marginal cost,
however, is zero because you pay the same $40 regardless how
many movies you stream. At the margin, streaming is free. When
deciding whether to watch a movie, a rational person would
compare the marginal benefit of watching a movie to the marginal
cost. In this case, the only cost is the value of your time.
c. Suppose that flying a 200-seat plane across the country costs the
airline $100,000, which means that the average cost of each seat is
$500. Suppose that the plane is minutes from departure and a
passenger is willing to pay $300 for a seat. Should the airline sell the
seat for $300? In this case, the marginal cost of an additional
passenger is very small.
d. Another example: Why is water so cheap while diamonds are
expensive? The marginal benefit of a good depends on how many
units a person already has. Because water is plentiful, the marginal
benefit of an additional cup is small. Because diamonds are rare, the
marginal benefit of an extra diamond is high.
3. A rational decision maker takes an action if and only if the marginal
benefit is at least as large as the marginal cost.
D. Principle #4: People Respond to Incentives
1. Definition of incentive: something that induces a person to act.
2. Because rational people make decisions by weighing costs and benefits,
their decisions may change in response to incentives.
a. When the price of a good rises, consumers will buy less of it because
its cost has risen.
b. When the price of a good rises, producers will allocate more
resources to the production of the good because the benefit from
producing the good has risen.
3. Many public policies change the costs and benefits that people face.
Sometimes policymakers fail to understand how policies alter incentives
and behavior and a policy may lead to unintended consequences.
4. Example: Seat belt laws increase the use of seat belts but lower the
incentives of individuals to drive safely. This leads to an increase in the
number of car accidents. This also leads to an increased risk for
pedestrians.
a. Instruction Idea: If you include any incentive-based criteria on your
syllabus, discuss it now. For example, if you reward class attendance
(or penalize students who do not attend class), explain to students
how this change in the marginal benefit of attending class (or
marginal cost of missing class) can be expected to alter their
behavior.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 7
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
III. How People Interact
A. Principle #5: Trade Can Make Everyone Better Off
1. Trade is not like a sports contest, where one side gains and the other side
loses.
2. Consider trade that takes place inside your home. Your family is likely to
be involved in trade with other families on a daily basis. Most families do
not build their own homes, make their own clothes, or grow their own
food.
3. Countries benefit from trading with one another as well.
4. Trade allows for specialization in products that countries (or families) can
do best.
B. Instruction Idea: There is a student activity that applies to this topic in the
"Additional Activities and Assignments” section.
C. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
1. Many countries that once had centrally planned economies have
abandoned this system and are trying to develop market economies.
2. Definition of market economy: an economy that allocates resources
through the decentralized decisions of many firms and households as they
interact in markets for goods and services.
3. Market prices reflect both the value of a product to consumers and the cost
of the resources used to produce it.
a. Instruction Idea: Explain to students that when households and
firms do what is best for themselves, they often end up doing what is
best for society, as if guided by market forces—or an invisible hand.
Spend some time and emphasize the magic of the market. Use
numerous examples to show students that the market most often
allocates resources to their highest valued use.
4. When a government interferes in a market and prevents price from
adjusting, household and firm decisions become distorted.
5. Centrally planned economies failed because they did not allow the market
to work.
6. FYI: Adam Smith and the Invisible Hand
a. Adam Smith’s 1776 work suggested that although individuals are
motivated by self-interest, an invisible hand guides this self-interest
into promoting society’s economic well-being.
b. Smith’s insights are at the center of modern economics and will be
analyzed more fully in the chapters to come.
7. Case Study: “Adam Smith Would Have Loved Uber”
D. Principle #7: Governments Can Sometimes Improve Market Outcomes
1. The invisible hand will only work if the government enforces property
rights.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 8
accessible website, in whole or in part.
10th Edition N. Gregory Mankiw
Notes
1- The file is chapter after chapter.
2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many new
editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
Instructor Manual
Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of
Economics
Prepared by David R. Hakes, University of Northern Iowa
TABLE OF CONTENTS
Purpose and Perspective of the Chapter ....................................................................................................... 2
Chapter Objectives ................................................................................................................................................ 2
Complete List of Chapter Activities and Assessments .............................................................................. 3
Key Terms ................................................................................................................................................................ 3
What's New in This Chapter ............................................................................................................................... 4
Chapter Outline ...................................................................................................................................................... 4
Solutions to Text Problems ............................................................................................................................. 10
Questions for Review ...................................................................................................................................................... 10
Problems and Applications ........................................................................................................................................... 11
Additional Activities and Assignments ....................................................................................................... 14
Additional Resources ........................................................................................................................................ 15
Cengage Video Resources .............................................................................................................................................. 15
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
PURPOSE AND PERSPECTIVE OF THE CHAPTER
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to the text.
Chapter 1 introduces ten fundamental principles on which the study of economics is based. In a
broad sense, the rest of the text is an elaboration on these ten principles. Chapter 2 will develop
how economists approach problems while Chapter 3 will explain how individuals and countries
gain from trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as building blocks for
the rest of the text. The ten principles can be grouped into three categories: how people make
decisions, how people interact, and how the economy works as a whole. Throughout the text,
references will be made repeatedly to these ten principles.
Key points addressed in this chapter:
• The fundamental lessons about individual decision making are that people face trade-offs
among alternative goals, that the cost of any action is measured in terms of forgone
opportunities, that rational people make decisions by comparing marginal costs and
marginal benefits, and that people change their behavior in response to the incentives they
face.
• The fundamental lessons about economic interactions among people are that trade and
interdependence can be mutually beneficial, that markets are usually a good way of
coordinating economic activity, and that the government can potentially improve market
outcomes by remedying a market failure or by promoting greater economic equality.
• The fundamental lessons about the economy as a whole are that productivity is the ultimate
source of improving living standards, that growth in the quantity of money is the ultimate
source of inflation, and that society faces a short-run trade-off between inflation and
unemployment.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
• Explain how scarcity influences decisions.
• Explain how individuals evaluate opportunity costs to make decisions.
• Explain how marginal analysis influences decision making.
• Apply basic, economic principles of individual decision making that determine how an
economy generally works.
• Explain how the terms of trade can lead to gains.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
• Given a scenario, identify the distribution system being used.
COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS
The following table organizes activities and assessments so that you can make decisions about
which content you would like to emphasize in your class. For additional guidance, refer to the
Teaching Online Guide.
Activity/Assessment Source (i.e., PPT slide, Duration
Workbook)
Icebreaker Activity PPT Slide 2 5–10 mins.
Active Learning 1 PPT Slide 14 5 mins.
Active Learning 2 PPT Slide 17 5 mins.
Active Learning 3 PPT Slide 28 20–25 mins.
Think-Pair-Share Activity PPT Slide 39 5–10 mins.
Self-Assessment PPT Slide 40 5–10 mins.
Section 01-1 QuickQuiz MindTap eBook 5 mins.
Section 01-2 QuickQuiz MindTap eBook 5 mins.
Section 01-3 QuickQuiz MindTap eBook 5 mins.
ConceptClip: Efficiency MindTap Learn It Folder 5 mins.
ConceptClip: Opportunity Cost MindTap Learn It Folder 5 mins.
ConceptClip: Externality MindTap Learn It Folder 5 mins.
Chapter 01 Problems & Applications MindTap Study It Folder 45–60 mins.
Chapter 01 A+ Test Prep MindTap Study It Folder N/A
Chapter 01 Homework MindTap Apply It Folder 30–45 mins.
Chapter 01 Quiz: Ten Principles of MindTap Apply It Folder 20–30 mins.
Economics
[return to top]
KEY TERMS
Business Cycle: fluctuations in economic activity, such as employment and production
Economics: the study of how society manages its scarce resources
Efficiency: the property of society getting the most it can from its scarce resources
Equality: the property of distributing economic prosperity uniformly among the members of
society
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
Externality: the uncompensated impact of one person’s actions on the well-being of a bystander
Incentive: something that induces a person to act
Inflation: an increase in the overall level of prices in the economy
Marginal Change: an incremental adjustment to a plan of action
Market Economy: an economy that allocates resources through the decentralized decisions of
many firms and households as they interact in markets for goods and services
Market Failure: a situation in which a market left on its own does not allocate resources efficiently
Market Power: the ability of a single economic actor (or small group of actors) to have a
substantial influence on market prices
Opportunity Cost: whatever must be given up to obtain some item
Productivity: the quantity of goods and services produced from each unit of labor
Property Rights: the ability of an individual to own and exercise control over scarce resources
Rational People: people who systematically and purposefully do the best they can to achieve their
objectives
Scarcity: the limited nature of society’s resources
[return to top]
WHAT'S NEW IN THIS CHAPTER
The following elements are improvements in this chapter from the previous edition:
• An expanded discussion of inflation in the United States following the coronavirus recession
of 2020.
[return to top]
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in
PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that
you can see how all the content relates to the topics covered in the text.
I. Introduction
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
A. The word “economy” comes from the Greek word oikonomos meaning “one who
manages a household.”
1. Instruction Idea: Begin by pointing out that economics is a subject that
students must confront in their daily lives. Point out that they already
spend a great deal of their time thinking about economic issues: changes in
prices, buying decisions, use of their time, concerns about employment,
etc.
B. Both households and economies face many decisions about how to allocate
resources.
C. Resources are scarce so they must be managed carefully.
1. Instruction Idea: You will want to start the semester by explaining to
students that part of learning economics is understanding a new
vocabulary. Economists generally use very precise (and sometimes
different) definitions for words that are commonly used outside of the
economics discipline. Therefore, it will be helpful to students if you follow
the definitions provided in the text as much as possible.
D. Definition of scarcity: the limited nature of society’s resources.
E. Definition of economics: the study of how society manages its scarce resources.
1. Keep in Mind: Because most college freshmen and sophomores have
limited experiences with viewing the world from a cause-and-effect
perspective, do not underestimate how challenging these principles will be
for the student.
2. Instruction Idea: As you discuss the ten principles, make sure that
students realize that it is okay if they do not grasp each of the concepts
completely or find each of the arguments fully convincing. These ideas will
be explored more completely throughout the text.
II. How People Make Decisions
A. Principle #1: People Face Trade-offs
1. “There ain’t no such thing as a free lunch.” To get something that we like,
we usually have to give up, or trade for, something else that we also like.
2. Examples include how students spend their time, how a family decides to
spend its income, how the U.S. government spends tax dollars, and how
regulations may protect the environment at a cost to firm owners.
3. An important trade-off that society faces is the trade-off between
efficiency and equality.
a. Definition of efficiency: the property of society getting the most it
can from its scarce resources.
b. Definition of equality: the property of distributing economic
prosperity uniformly among the members of society.
c. For example, tax dollars paid by wealthy Americans and then
distributed to those less fortunate may improve equality but lower
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 5
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
the return to hard work and therefore reduce the level of output
produced by our resources.
d. This implies that the cost of this increased equality is a reduction in
the efficient use of our resources.
4. Recognizing that trade-offs exist does not indicate what decisions should
or will be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
1. Making decisions requires individuals to consider the benefits and costs of
some action.
2. What are the costs of going to college?
a. We should not count room and board (unless they are more
expensive at college than elsewhere) because the student would
have to pay for food and shelter even if she were not in school.
b. We should count the value of the student’s time because she could be
working for pay instead of attending classes and studying.
3. Definition of opportunity cost: whatever must be given up in order to
obtain some item.
a. Keep in Mind: One of the hardest ideas for students to grasp is that
“free” things are not truly free. Provide students with many
examples of such “free” things with hidden costs, especially the value
of time. Suggested examples include the time students spend waiting
in line for “free” sporting event tickets at their universities, time
spent relaxing in the sun outside their residence halls, or driving on a
road with no tolls but lots of congestion.
C. Principle #3: Rational People Think at the Margin
1. Economists generally assume that people are rational.
a. Definition of rational people: people who systematically and
purposefully do the best they can to achieve their objectives.
b. Consumers want to purchase the goods and services that allow them
the greatest level of satisfaction given their incomes and the prices
they face.
c. Firm managers want to produce the level of output that maximizes
the profits the firms earn.
2. Many decisions in life involve incremental decisions: Should I remain in
school this semester? Should I take another course this semester? Should I
study another hour for tomorrow’s exam?
a. Definition of marginal change: a small incremental adjustment to a
plan of action.
b. Example: Suppose that you are considering watching a movie
tonight. You pay $40 a month for a streaming service that gives you
unlimited access to its film library. If you typically watch 8 movies a
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 6
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
month, the average cost of a movie is $5. The marginal cost,
however, is zero because you pay the same $40 regardless how
many movies you stream. At the margin, streaming is free. When
deciding whether to watch a movie, a rational person would
compare the marginal benefit of watching a movie to the marginal
cost. In this case, the only cost is the value of your time.
c. Suppose that flying a 200-seat plane across the country costs the
airline $100,000, which means that the average cost of each seat is
$500. Suppose that the plane is minutes from departure and a
passenger is willing to pay $300 for a seat. Should the airline sell the
seat for $300? In this case, the marginal cost of an additional
passenger is very small.
d. Another example: Why is water so cheap while diamonds are
expensive? The marginal benefit of a good depends on how many
units a person already has. Because water is plentiful, the marginal
benefit of an additional cup is small. Because diamonds are rare, the
marginal benefit of an extra diamond is high.
3. A rational decision maker takes an action if and only if the marginal
benefit is at least as large as the marginal cost.
D. Principle #4: People Respond to Incentives
1. Definition of incentive: something that induces a person to act.
2. Because rational people make decisions by weighing costs and benefits,
their decisions may change in response to incentives.
a. When the price of a good rises, consumers will buy less of it because
its cost has risen.
b. When the price of a good rises, producers will allocate more
resources to the production of the good because the benefit from
producing the good has risen.
3. Many public policies change the costs and benefits that people face.
Sometimes policymakers fail to understand how policies alter incentives
and behavior and a policy may lead to unintended consequences.
4. Example: Seat belt laws increase the use of seat belts but lower the
incentives of individuals to drive safely. This leads to an increase in the
number of car accidents. This also leads to an increased risk for
pedestrians.
a. Instruction Idea: If you include any incentive-based criteria on your
syllabus, discuss it now. For example, if you reward class attendance
(or penalize students who do not attend class), explain to students
how this change in the marginal benefit of attending class (or
marginal cost of missing class) can be expected to alter their
behavior.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 7
accessible website, in whole or in part.
, Instructor Manual: Mankiw, Principles of Macroeconomics, 10e, 9780357722718; Chapter 1: Ten Principles of Economics
III. How People Interact
A. Principle #5: Trade Can Make Everyone Better Off
1. Trade is not like a sports contest, where one side gains and the other side
loses.
2. Consider trade that takes place inside your home. Your family is likely to
be involved in trade with other families on a daily basis. Most families do
not build their own homes, make their own clothes, or grow their own
food.
3. Countries benefit from trading with one another as well.
4. Trade allows for specialization in products that countries (or families) can
do best.
B. Instruction Idea: There is a student activity that applies to this topic in the
"Additional Activities and Assignments” section.
C. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
1. Many countries that once had centrally planned economies have
abandoned this system and are trying to develop market economies.
2. Definition of market economy: an economy that allocates resources
through the decentralized decisions of many firms and households as they
interact in markets for goods and services.
3. Market prices reflect both the value of a product to consumers and the cost
of the resources used to produce it.
a. Instruction Idea: Explain to students that when households and
firms do what is best for themselves, they often end up doing what is
best for society, as if guided by market forces—or an invisible hand.
Spend some time and emphasize the magic of the market. Use
numerous examples to show students that the market most often
allocates resources to their highest valued use.
4. When a government interferes in a market and prevents price from
adjusting, household and firm decisions become distorted.
5. Centrally planned economies failed because they did not allow the market
to work.
6. FYI: Adam Smith and the Invisible Hand
a. Adam Smith’s 1776 work suggested that although individuals are
motivated by self-interest, an invisible hand guides this self-interest
into promoting society’s economic well-being.
b. Smith’s insights are at the center of modern economics and will be
analyzed more fully in the chapters to come.
7. Case Study: “Adam Smith Would Have Loved Uber”
D. Principle #7: Governments Can Sometimes Improve Market Outcomes
1. The invisible hand will only work if the government enforces property
rights.
© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 8
accessible website, in whole or in part.
